1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. For high-yield CDs, compounding allows your investment to grow faster as you earn interest on both your original investment and the interest that accumulates.

2. How the Calculator Works

The calculator uses the compound interest formula:

Where:

• \( A \) — Final amount
• \( P \) — Principal investment amount
• \( r \) — Annual interest rate (decimal)
• \( n \) — Number of compounding periods per year
• \( t \) — Time the money is invested for (years)

Explanation: The more frequently interest is compounded, the greater the return on investment.

3. Importance of Compounding Frequency

Details: Daily compounding will yield slightly more than monthly, which yields more than quarterly, and so on. The difference becomes more significant with higher interest rates and longer terms.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate (as a percentage), term length in years, and select how often interest is compounded. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR (Annual Percentage Rate) doesn't account for compounding, while APY (Annual Percentage Yield) does. This calculator shows the APY effect.

Q2: Are high-yield CD rates fixed?
A: Typically yes - most high-yield CDs offer fixed rates for the term length, unlike savings accounts with variable rates.

Q3: What's the typical term for high-yield CDs?
A: Terms usually range from 6 months to 5 years, with longer terms often offering higher rates.

Q4: Are there penalties for early withdrawal?
A: Most CDs charge a penalty (often several months' interest) for withdrawing before maturity.

Q5: How are CD interest payments taxed?
A: Interest is taxable as ordinary income in the year it's earned, even if not withdrawn.